The Law of Deposits

The law regarding standard real estate transactions is or should be straightforward. Unfortunately, courts — and particularly courts that should know much better — continue to make serious mistakes, mistakes that will cost clients a lot of money to correct.

The Ontario Court of Appeal has now repeated, in just about eight months, a serious mistake in the law of deposits. The initial mistake was made in Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149, 86 B.L.R. (5th) 1, 98 R.P.R. (5th) 177 (Hourigan, Miller & Paciocco JJ.A.). In that case, two serious mistakes were made. First, the Court of Appeal completely misunderstood the law of pre-incorporation contracts and the consequences of the disclaimer of that “contract” under the Ontario Business Corporations Act, subsection 21(2.1). On the disclaimer of the contract, the person who entered into the contract on behalf of a the corporation-to-be-incorporated is, subject to subsection 21(4), not bound by it. The Court of Appeal nevertheless held that the person, the plaintiff, had no right to recover the deposit he had paid, notwithstanding that the contract had not been adopted and he had disclaimed personal liability under subsection 21(4).

The second mistake was in the Court of Appeal’s statement of the law of deposits. Miller J.A. said:

[7]        The motion judge provided a helpful summary of the law: a deposit is not part of the contract of purchase and sale, but “stands on its own as an ‛ancient invention of the law designed to motivate contracting parties to carry through with their bargains,’ ‛something which binds the contract and guarantees its performance,’ and is an ‛earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.’”

(Emphasis added.)

How on earth can “a deposit not be part of the contract of purchase and sale”? The obligation to pay the deposit is part of the agreement of purchase and sale, where, of course, the obligation to pay the deposit and its treatment is specified. The obligation to pay the deposit can only come from the agreement of purchase and sale the parties, the vendor and purchaser, have executed; how then can the deposit not be part of that agreement? It is simply anachronistic to rely on a case decided in 1884 when the practice of conveyancers in England was very different from the current practice in Canada.

That characterization of the source or nature of the deposit led the court to hold that the vendor’s right to retain the deposit survived the disclaimer of the agreement by the plaintiff. In that respect, the statement of Miller J.A. that the deposit gives the plaintiff an incentive to perform the contract is, of course, nonsense; you can't have an incentive to perform a contract that has been disclaimed and is, as a result, unenforceable. Section 21 of the OBCA makes it clear that the vendor who makes a pre-incorporation contract can have no expectation, let alone a reasonable expectation, that the corporation will perform the contract; if vendors don’t want to assume that risk, then they must not agree to sell land or anything by a pre-incorporation contract.

Not content with muddying the waters in this case, the Court of Appeal quoted from Benedetto and reproduced the same paragraph in Azzarello v. Shawqi, 2019 ONCA 820, para. 46 (Feldman, Paciocco & Fairburn JJ.A).

Apart from giving credence to the mistake made by Miller J.A., Feldman J.A. nevertheless did achieve the correct result by holding that what is paid as a deposit and forfeited on the purchaser’s default, can be set off against any amount awarded to the vendor as damages. In fact, this result would seem to reinforce the argument that for the setoff against an award of damages to be applicable, the deposit is to be considered part of the agreement of purchase and sale and not be considered its own agreement, against which there is nothing to set off.

It is alarming to find a normally careful court make such serious mistakes, and to repeat them. What is a solicitor to do? Do the usual agreements for the purchase and sale of land have to be re-drafted to make it clear that the obligation to pay the deposit is part of the agreement of purchase and sale? Does the drafter of a pre-incorporation contract now have to spell out, as part of the contract, what the Ontario Business Corporations Act or Canada Business Corporations Act say?